Remember that joy when you saw your baby for the first time? What an amazing feeling knowing that you brought so much joy to the world. Now imagine your happiness when you realize that you not only brought joy but more tax breaks for you and your family. Let’s put aside the fact that according to the Department of Agriculture, it costs on average $245,340 to raise a child in the US until age 18 (I think we all know that this doesn’t even come close to the actual costs in the Jewish world). For the moment being, our focus is not on the fact that you are about to become an ATM machine for that little bundle of joy, but rather what you can save in taxes.
Extra Exemption: In 2014, you can claim a $3,950 exemption for each qualifying dependent. In other words, $3,950 of your income will not be taxed. So if you are in the 25% tax bracket, this will save you $987.50 in taxes owed to the government.
Child Tax Credit: For each child under age 17 at of the end of the calendar year, you are eligible for a tax credit of up to $1,000 per child on your tax return. However, you should note that this credit begins to be phased out (on married filing joint tax returns) with adjusted gross income of $110,000, and the credit amount is reduced by $50 for each $1,000 over $110,000.
Adoption Tax Credit: If you adopted a child in 2014, you can receive a tax credit for your costs up to $13,190 per eligible child. However, the adoption of a child who has been determined to have special needs can claim the full credit of $13,190 as their expenses, regardless of their actual adoption expenses. The phase-out of this credit begins at adjusted gross income of $194,580 (on married filing joint tax returns) and is completely phased out at $234,580 or more.
The Child and Dependent Care Credit: Un-reimbursed payments made for the care for a child under the age of 13, or other qualifying dependent, while you work may qualify you for a tax credit from $600 (for one dependent) up to $2100 (for two or more dependents) depending on your income. While the IRS has stated that grades kindergarten and up do not qualify as valid expenses, summer camps do qualify (overnight camps do not qualify).
Hiring Your Child: If you are the sole proprietor of your own business, you should consider employing your child (under the age of 18) for certain tasks to help with the business. That’s right, put your kid to work. Now, there are some rules to abide by before you go this route, but this can be a great way of saving tax dollars. Firstly, your child shouldn’t be too young or the IRS won’t believe they are actually working for you. How young is too young? Surprisingly, the IRS has accepted on several occasions that a seven year old may be an employee (and you thought the US was against child labor). The compensation must also be reasonable. I think the IRS may catch on if you are paying your nine year old $400 an hour to clean your office. You must also comply with the same legal requirements when hiring your child as you do when hiring any other employee. This includes completing an IRS Form W-4 as well as other paperwork. On the upside though, you can pay your child up to $6,200 in wages (the maximum standard deduction for the single person in 2014) without incurring income taxes and most employment taxes. The wages would be tax-free to your child and you could deduct the wages as a business expense on your own tax return. For a taxpayer in the 25% tax bracket, this could be a savings of $1,550.